FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17162
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KEY PRODUCTION COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1089744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Norwest Center, 20th Floor
1700 Lincoln Street, Denver, Colorado 80203-4520
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 837-0779
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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The number of shares of Key Production Company, Inc. common stock, $.25 par
value, outstanding as of March 31, 1995, is 9,174,594.
PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS
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KEY PRODUCTION COMPANY, INC.
STATEMENT OF INCOME
(Unaudited)
For the Three Months
Ended March 31,
--------------------
(In thousands, except per share data) 1995 1994
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REVENUES:
Oil and gas production revenues $4,736 $ 2,774
Other revenues 2 11
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4,738 2,785
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OPERATING EXPENSES:
Depreciation, depletion and amortization 1,756 976
Operating costs 1,574 766
Administrative, selling and other 337 281
Financing costs:
Interest expense 56 -
Interest income (3) (72)
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3,720 1,951
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INCOME BEFORE INCOME TAXES 1,018 834
PROVISION FOR INCOME TAXES 387 317
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NET INCOME $ 631 $ 517
======= =======
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .07 $ .05
======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,561 10,256
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The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
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(In thousands) 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 631 $ 517
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 1,756 976
Deferred income taxes 346 284
Changes in operating assets and liabilities:
Decrease in receivables 1,111 680
Increase in prepaid expenses (280) (2,320)
Increase (decrease) in accounts payable
and accrued expenses (709) 247
Increase (decrease) in long-term property
liabilities and other (174) 20
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Net cash provided by operating activities 2,681 404
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CASH FLOWS FROM INVESTING ACTIVITIES:
Oil and gas exploration and development
expenditures (2,712) (714)
Acquisition of oil and gas properties (85) -
Proceeds from sale of oil and gas properties 87 5
Other capital expenditures (77) (108)
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Net cash used by investing
activities (2,787) (817)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings 900 -
Payments to acquire treasury stock - (1)
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Net cash provided (used) by financing
activities 900 (1)
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 794 (414)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 281 9,215
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,075 $ 8,801
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The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
BALANCE SHEET
(In thousands) March 31, December 31,
1995 1994
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(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,075 $ 281
Receivables 2,265 3,376
Prepaid expenses 440 160
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3,780 3,817
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OIL AND GAS PROPERTIES, ON THE BASIS OF
FULL COST ACCOUNTING:
Proved properties 51,476 49,381
Unproved properties and properties
under development, not being amortized 8,021 7,953
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59,497 57,334
Less - accumulated depreciation,
depletion and amortization (10,831) (9,105)
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48,666 48,229
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OTHER ASSETS, NET 612 565
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$53,058 $52,611
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,632 $ 2,193
Accrued lease operating expense and other 858 1,565
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2,490 3,758
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LONG-TERM DEBT 10,900 10,000
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DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES
Income taxes 3,002 2,656
Long-term property liabilities and other 1,766 1,940
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4,768 4,596
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STOCKHOLDERS' EQUITY:
Common stock, $.25 par value, 50,000,000
shares authorized, 11,656,350 shares issued 2,914 2,914
Paid-in capital 34,390 34,388
Retained earnings 7,066 6,435
Treasury stock at cost, 2,481,756 and
2,484,351 shares, respectively (9,470) (9,480)
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34,900 34,257
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$53,058 $52,611
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The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Stock-
Common Paid-in Retained Treasury holders'
Stock Capital Earnings Stock Equity
------ ------- -------- -------- --------
(In thousands, except per share data)
BALANCE, DECEMBER 31, 1994 $2,914 $34,388 $6,435 $(9,480) $34,257
Net income - - 631 - 631
Treasury stock issued - 2 - 10 12
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BALANCE, MARCH 31, 1995 $2,914 $34,390 $7,066 $(9,470) $34,900
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The accompanying notes to financial statements are
an integral part of this statement.
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KEY PRODUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim
periods, on a basis consistent with the annual audited statements. All such
adjustments are of a normal, recurring nature except as disclosed herein.
Certain information, accounting policies, and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the financial statements and summary of significant
accounting policies and notes thereto included in the Company's latest annual
report on Form 10-K.
INCOME TAXES
Income tax expense consisted of the following:
Three Months Ended March 31,
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1995 1994
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Current Taxes:
Federal $ - $ -
State 41 33
Deferred Taxes: 346 284
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$ 387 $ 317
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NET INCOME PER SHARE
Net income per common and common equivalent share is computed using the
weighted average number of shares and common equivalent shares outstanding for
the period presented. When dilutive, outstanding options to purchase common
stock are included as share equivalents using the treasury stock method. Only
one per share figure is presented for each period because fully diluted net
income per share is not materially different from primary net income per share.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments earned 5.8 percent and 5.3 percent rates of interest at March 31,
1995 and December 31, 1994, respectively, with cost approximating market.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Three Months
Ended March 31,
--------------------
1995 1994
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(In thousands)
Cash paid during the period for:
Interest (net of amounts capitalized) $ 39 $ -
Income taxes (net of refunds received) $ 169 $ (1)
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PRO FORMA FINANCIAL INFORMATION
On April 29, 1994, Key completed a transaction to purchase all the assets
of a privately-held oil and gas company for $22.75 million. As of the effective
date, October 1, 1993, the assets included 2.6 million barrels of oil, 8 million
cubic feet of natural gas and approximately 980,000 net undeveloped acres. Key
used cash on hand and a $12.5 million draw on its credit facility to fund the
acquisition.
The following unaudited pro forma information was prepared as if the
acquisition occurred on January 1, 1994. The pro forma data presented is based
on numerous assumptions and is not necessarily indicative of future operations.
Three Months Ended
March 31, 1994
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(In thousands, except per share data)
Revenues $ 4,708
Net income $ 812
Net income per share $ .08
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL RESULTS
Key is reporting net income of $631,000, or $.07 per share, for the first
three months of 1995. This compares to $517,000, or $.05 per share, for the same
period of 1994. Earnings for the first quarters of 1995 and 1994 are based on
revenues of $4.7 million and $2.8 million, respectively.
RESULTS OF OPERATIONS
For the Three Months
Ended March 31,
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1995 1994
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Selected Oil and Gas
Operating Statistics
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Gas Volume - Mcf per day 14,204 10,479
Gas Price - Per Mcf $ 1.70 $ 2.38
Oil Volume - Barrels per day 1,809 490
Oil Price - Per barrel $ 15.37 $ 11.55
Full Cost Amortization Rate 36.5% 34.6%
Oil and gas production revenues increased by $2 million, or 71 percent to
reach $4.7 million in the first quarter of 1995. The increase is a result of the
Company's second quarter 1994 acquisition and the positive impact that wells
drilled or recompleted since last year are having on oil and gas production.
Oil sales for the current period are nearly five times those from a year
ago due to favorable pricing and increased production. Key is reporting oil
sales of $2.5 million for the first three months of 1995 compared to $.5 million
for 1994. Most of the increase ($1.4 million) was achieved through production
increases. Daily oil production averaged 1,809 barrels in the first three months
of 1995 compared to 490 barrels per day in 1994. The quadrupling of volumes is
largely attributable to the Company's second quarter 1994 acquisition which was
predominantly oil. Key's average oil price increased from a depressed $11.55 in
1994 to $15.37 per barrel in 1995. The favorable pricing added $.6 million.
Gas sales declined 3 percent to $2.1 million for the first three months of
1995. A 36 percent increase in production was countered by a 29 percent price
drop. Key's daily gas production climbed from 10,479 Mcf per day in 1994 to
14,204 Mcf per day in 1995. The increase in production was accomplished with an
aggressive drilling and recompletion program, and to a smaller extent, the
Company's 1994 acquisition. Key's average gas price slipped from $2.38 per Mcf
in 1994 to $1.70 per Mcf in 1995. In the first quarter of 1995, 46 percent of
Key's total revenue was derived from gas. Eighty-one percent of revenue came
from gas sales in the first quarter of 1994.
Depreciation, depletion and amortization (DD&A) expense increased by 80
percent between 1995 and 1994. The increase corresponds with Key's higher oil
and gas sales and increased investment in net properties in 1995. The oil and
gas amortization rate increased slightly from 34.6 percent to 36.5 percent in
1995.
The Company's operating expenses doubled between the first quarter of 1994
and 1995. The increase is largely due to the 1994 second quarter acquisition and
is in line with escalating oil and gas revenues. On a unit of production basis,
operating expenses for the first three months of 1995 are $.70 per EMcf, up from
$.63 per EMcf in 1994. The Company attributes the increase to the fact that the
acquired properties have a higher oil percentage
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than Key's pre-acquisition properties and oil properties generally have higher
lifting costs than gas properties. (Oil is compared to natural gas in terms of
equivalent thousand cubic feet, "EMcf." One barrel of oil is the energy
equivalent of six Mcf of natural gas.)
Administrative, selling and other costs for the current quarter increased
by 20 percent to $.3 million. The increase in administrative expense is caused
by the larger asset base that Key currently administers. Based on units of
production, administrative expense declined to $.15 per EMcf in 1995 from $.23
per EMcf in 1994.
In the second quarter of 1994, Key entered into a $50 million credit
facility with NationsBank of Texas, N.A. The Company elected an $18 million
borrowing base and drew $12.5 million to fund the acquisition. The Company had
interest expense of $185,000 in 1995. Key had no interest expense in the first
quarter of 1994 since it was debt free.
Interest of $129,000 was capitalized for borrowings associated with the
undeveloped leasehold acquired in the second quarter of 1994. No capitalized
interest was recorded for the first quarter of 1994.
Interest income of $3,000 and $72,000 was recorded for the first quarters
of 1995 and 1994, respectively. The high interest income in 1994 reflects the
investment of property sales proceeds from the first quarter of 1993. Interest
income for 1995 declined due to a decrease in the average cash balance.
Available cash was used to partially fund the acquisition.
CASH FLOW AND LIQUIDITY
Liquidity refers to the ability of an enterprise to generate adequate
amounts of cash to satisfy its financial commitments. Key's primary needs for
cash are to fund oil and gas exploration, development and acquisition activities
and for payment of existing obligations and trade commitments related to oil and
gas operations. The Company's primary sources of liquidity are cash flows from
operating activities and proceeds from financing activities. Management believes
that the overall sources of funds available to Key will continue to be more than
sufficient to satisfy the Company's financial obligations.
Cash provided by operating activities was $2.7 million compared to $.4
million provided in the first quarter of 1994. Increased income, DD&A and
deferred taxes contributed $1 million, with the remainder of the increase due
to the net change in working capital accounts.
Key is stepping up drilling activity in 1995. Cash expenditures for
exploration and development for the first three months of 1995 totaled $2.7
million, or 100 percent of cash from operating activities. The 1995 expenditure
represents a $2 million increase over the $.7 million expended on drilling
activity in the first three months of 1994.
In the first quarter of 1995, Key drew an additional $.9 million on its
credit facility with NationsBank.
The Company's ratio of current assets to current liabilities was 1.5 to 1
at March 31, 1995, an increase from the 1 to 1 ratio calculated at December 31,
1994.
Management believes that cash on hand at year-end, net cash generated from
operations and remaining amounts available under the existing line of credit
will be adequate to meet future liquidity needs, including satisfying
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the Company's financial obligations and funding operations, exploration and
development activities.
FUTURE TRENDS
The Company continues to pursue opportunities to increase drilling
activity. The regional exploration offices opened in Tulsa, Oklahoma and
Houston, Texas in the fourth quarter of 1994 and the first quarter of 1995,
respectively, are focused on identifying these opportunities.
The low natural gas prices have negatively impacted revenue and, to the
extent gas prices do not recover, this effect will continue. The property
acquisition that was completed in the second quarter of 1994 was heavily
weighted toward oil production. Oil production this quarter nearly quadrupled
compared to the first quarter of 1994 due primarily to oil production from the
acquired properties. Oil prices have been relatively strong and if this
continues, the increased oil revenue will help mitigate the effect of lower gas
prices. However, there is no assurance as to the future direction of either oil
or gas prices.
In March 1994, the Company entered into a joint venture with a major oil
company for the exploration of certain California gas fields owned by that
company. The agreement, which covers approximately 15,000 gross acres of
producing leasehold in the gas-prone Sacramento Basin, may result in the
drilling of up to 10 wells during 1995. Depending on the ultimate extent of this
drilling program, Key may consider establishing a regional exploration office in
that area at some point in the future.
The Company also continues to review acquisition and joint venture
opportunities as they arise. As in the past, transactions of this type may be
consummated if the economic and strategic factors appear favorable.
Cash provided by operating activities will be negatively impacted if the
currently depressed natural gas prices continue. However, the Company still
expects that cash on hand, net cash generated by operating activities and
amounts available under the credit facility will be adequate to meet future
liquidity needs under current corporate policies. Management believes that the
overall sources of funds available to Key will continue to be sufficient to
provide resources to meet the Company's exploration, development and acquisition
objectives.
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PART II. - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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None.
ITEM 2. CHANGES IN SECURITIES
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None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
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None.
ITEM 5. OTHER INFORMATION
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
27.1 Financial Data Schedule for Commercial and
Industrial Companies per Article 5 of
Regulation S-X for the year ended March 31, 1995.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 1995
KEY PRODUCTION COMPANY, INC.
/s/ MONROE W. ROBERTSON
______________________________
Monroe W. Robertson
Senior Vice President and Secretary
(Principal Financial Officer)
/s/ CATHY L. ANDERSON
______________________________
Cathy L. Anderson
Controller
(Principal Accounting Officer)
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